As earnings falter, prospects for Q4 grow worse

90% of corporate forecasts see results below Wall Street consensus

SAN FRANCISCO (MarketWatch) — Halfway through the third-quarter earnings season, one thing is becoming clear: the fourth quarter is likely to be gloomy.

Even though many companies have forecast fourth-quarter results below the Wall Street consensus, analysts have been slow to react. That worries Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Analysts currently estimate fourth-quarter operating earnings of $26.60 a share for the S&P 500 Index
SPX, -0.23%
according to Silverblatt. That’s down from $26.87 a share at the end of the third quarter, but well above the all-time record of $25.43 a share reached in the second quarter of this year. The current estimate is still too high given the number of profit warnings during this earnings season, Silverblatt said.

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Uncertainty over the U.S. elections in November may be holding many analysts back from changing their numbers for the sake of clarity, he said.

“At least when we wake up the day after election day, we’ll know who the players are,” Silverblatt said. “We’ll know the House, the Senate, who the president is, and most importantly, have an idea of how negotiations will go, so you can do realistic projections.”

Right now analysts have so many variables going on, they have to run more scenarios than is practicable. The problem with that practice is that the longer analysts wait, the more pronounced an effect it’ll have on markets when they do cut estimates.

“I’m just hoping it will not be a massive one across the board,” Silverblatt said. “That can come somewhat as a shock.”

As of Tuesday midday, among S&P 500 companies, 35 out of 39 firms, or 90%, that gave forecasts have provided an earnings outlook that guides below the Wall Street consensus, according to John Butters, senior earnings analyst at FactSet. That’s even worse than the 78% negative forecast rate going into third-quarter earnings season, which was the lowest recorded by FactSet since it began tracking the data in 2006.

Similarly, among S&P 500 companies, 25 out of 28, or 89%, have said fourth-quarter revenue will come in below consensus.

Earnings-per-share growth for the S&P 500 is now projected at 8.3% for the fourth quarter, down from the 9.5% forecast on Sept. 30. Sales for the fourth quarter are now expected to grow by 2.7%, compared with the 3.1% estimate on Sept. 30, according to Butters.

Forecasts going into third-quarter earnings season were looking at a 2.7% decline in year-over-year earnings growth with flat revenue, according to FactSet. That threatens to turn in the first earnings decline in 12 quarters.

Of the 186 companies in the S&P 500 that have reported third-quarter results so far, 59% have reported earnings and 38% have reported revenue above the Wall Street consensus, according to Thomson Reuters I/B/E/S. And that’s even with the bar being especially low going into this earnings season. So far, earnings are down 3.9% year-over-year from companies that have already reported, with revenue up 0.4%, according to Thomson Reuters I/B/E/S.

Most notably, the tech and industrial sectors are calling for a rough fourth quarter.

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